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Refinance or refinancing is a process that helps you to pay off an existing mortgage by taking out a new loan from the same or different lender against the same property kept as the collateral. You can also pay off other debts provided the new loan amount is larger than the outstanding balance on the existing mortgage.

However, you can benefit from refinance only when you’re aware of what you shouldn’t do at the time of refinancing. Here are the 5 things you should avoid while you refinance.

1. Refinancing for more than market value: It’s better not to refinance your home for more than it’s market value because you’ll be paying much higher rates and charges. Moreover, if your home is foreclosed, it may difficult to recover the unpaid balance from the sale proceeds.

2. Refinancing just to pay off unsecured debts: You may have piled up a lot of unsecured debts (credit card debts, personal loans, etc). But this doesn’t mean that you’ll refinance the existing mortgage, which you can afford to pay. Refinancing just to repay credit card debts is a wrong move because if you fail to pay off the new loan, you may end up losing your home.

3. Getting lured by promotional stuff/low rates: When it comes to choosing the lender/mortgage company, avoid companies sending in promotional stuff through mails or giving ads with special focus on very low introductory rates. This is because you never know how long such a low rate will last for – perhaps only for 1-2 months and then the rates will adjust thereby raising your monthly payments, which may not be affordable.

Moreover, you shouldn’t accept a telephone solicitation without checking out the lender’s profile and service background. In short, you need to avoid scam artists and loan sharks by checking out their reliability report from the BBB or going through their clients’ testimonials.

It’s better to fix up an appointment with the lender, have a straight talk with him about your situation and then think upon the loan offers he has to suggest.

4. Not checking the APR: Don’t forget to check the APR or Annual Percentage Rate on your loan. It is the effective rate that includes the interest rate, closing costs as well as other charges. A lower interest rate may not indicate a low APR; so when you compare loans, take into account the APR as well as the interest rate and not just a single factor.

5. Trying out negative amortization loans: It’s better to avoid negative amortization loans such as Option ARMs, which are found to be attractive on account of their minimum payment option. But when you refinance in order to pay off debts and get a lower rate, it’s clear that you don’t want a bigger payment awaiting you in the next few months. Thus, it’s best to proceed with fully amortized loans.

Know-how of what to avoid when you refinance helps you stay away from the traps involved in getting a new loan. The best thing is to do comparison-shopping with a few more lenders apart from the one you’re dealing with. While you do so, get mortgage quotes from lenders and compare the rates, costs and monthly payments. This will narrow down your search for the best lender.

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